Ethanol Industry Suffers Change of Fortune Plants Shut Down As Energy Prices Slump

Barely a year after the U.S. Congress enacted an energy law to foster a huge national enterprise capable of converting plants and agricultural wastes into automotive fuel, the goals lawmakers set for the ethanol industry are in serious jeopardy.

As recently as last summer, plants that make ethanol from corn were sprouting across the Midwest. But now, with motorists driving less during the economic downturn, the industry is burdened with excess capacity, and plants are shutting down virtually every week.

In the meantime, planning and construction have fallen behind schedule for a new generation of plants that was supposed to produce ethanol from substances like wood chips and crop waste, overcoming many of the problems associated with corn ethanol. That nascent branch of the industry concedes it has virtually no chance of meeting Congressional production mandates that kick in next year.

The decline in fortunes has been extreme for both kinds of ethanol since last summer, when $145-a-barrel oil and $4-a-gallon gasoline appeared to shift the economics of the fuel industry to favor biofuels.

Only a few months ago, refiners in some regions were buying up as much corn ethanol as they could to blend with pricey gasoline - and effectively keeping prices at the pump a bit lower. Meanwhile, investors seemed willing to finance plants designed to produce next- generation biofuels, given predictions that they would compete against oil that might soon cost $200 a barrel.

But since the summer, oil and gasoline prices have plunged, while the price of corn, from which virtually all commercial ethanol in the United States is made, has remained relatively high. Refiners are limiting their ethanol purchases to a level required to meet federal blending mandates - a level far below the industry's capacity.

"The ethanol industry is on its back despite the billions of dollars they have gotten in taxpayer assistance, and a guaranteed market," said Amy Myers Jaffe, an energy industry analyst at Rice University. "Congress passed something that was economically, logistically and scientifically implausible."

In its recent annual energy forecast, the Energy Information Administration predicted that the targets set in the 2007 energy law enacted by Congress for expanded use of ethanol and other biofuels by the year 2022 would fall short by nearly 17 percent.

"Its possible we may have to look at the targets again," Senator Jeff Bingaman, a New Mexico Democrat and the chairman of the Senate Energy and Natural Resources Committee, said in an interview. "Obviously the ethanol industry is in some difficulty now."

VeraSun Energy, a major American ethanol producer, has suspended production in 12 of its 16 plants and is planning to sell production facilities.

Bob Dinneen, president of the Renewable Fuels Association, a trade group, estimated that of the 150 ethanol companies and 180 plants in the United States, 10 or more companies had shut down 24 plants over the past three months. That has idled about two billion gallons out of 12.5 billion gallons of production capacity. He estimated that a dozen more companies were in financial distress.

Kevin Book, a senior vice president of FBR Capital Markets, said ethanol did not make economic sense at the moment. He estimated that an ethanol plant lost 21 cents for every gallon of ethanol it sold, and a refiner lost 18 cents for every gallon of ethanol it blended.

This is not how it was supposed to be when Congress mandated in 2007 that refiners blend increasing amounts of ethanol into the country's transportation fuel supply. The law came at a time when Americans were driving more year by year, the country's thirst for gasoline seemed unquenchable and oil prices seemed only to go up.

In an effort to reduce the country's dependence on foreign oil and lower the greenhouse gas emissions that contribute to global warming, Congress mandated a doubling of corn ethanol use, to 15 billion gallons a year by 2015. By 2022, Congress mandated the use of an additional 21 billion gallons of ethanol and other biofuels produced from materials collectively known as biomass. The potential materials include corn stubble, wood chips, straw and even garbage.

Congress and many scientists and environmentalists hoped that the advanced biofuels would overcome the longstanding controversies associated with corn ethanol, including the contention that its production raises food prices. Congress started small, decreeing that industry produce 100 million gallons of advanced biofuels next year and 250 million gallons in 2011.

The Environmental Protection Agency can waive that mandate if the industry is unable to produce enough of the new ethanol. These advanced fuels are having trouble just getting off the ground.

Producing the advanced fuels entails breaking down a tough material, known as cellulose, that is abundant in corn cobs, wood chips and other biological waste. The cost of doing that can be as much as a dollar a gallon more than producing corn ethanol. So far, not a drop of advanced ethanol has been produced at commercial scale.

Carlos Riva, president and chief executive officer of Verenium, a company working to produce ethanol out of sugar cane waste, is optimistic the challenges can be overcome. He and other executives say a handful of promising projects are under development that could meet the 2011 and 2012 targets a few years late.

Small, mostly private companies that go by names like Range Fuels, Poet and BlueFire Ethanol have an assortment of pilot and demonstration plants and are planning to move into commercial production over the next few years.

Others are not so confident, in part because private investment in advanced biofuels has dried up. Venture capital and private equity investments in such biofuels plummeted to $109 million in the fourth quarter of 2008 from $254 million in the third quarter after hitting almost $600 million in the first six months of the year, according to New Energy Finance, a company that monitors investments in green technology.

"Cellulosic ethanol is something that is always five years away and five years later you get to the point where it's still five years away," said Aaron Brady, an energy expert at Cambridge Energy Research Associates, a consulting firm.

Originally published by The New York Times Media Group.